Page 159 - The Principle of Economics

APPLICATION: THE COSTS OF TAXATION
Taxes are often a source of heated political debate. In 1776 the anger of the Ameri- can colonies over British taxes sparked the American Revolution. More than two centuries later Ronald Reagan was elected president on a platform of large cuts in personal income taxes, and during his eight years in the White House the top tax rate on income fell from 70 percent to 28 percent. In 1992 Bill Clinton was elected in part because incumbent George Bush had broken his 1988 campaign promise, “Read my lips: no new taxes.”
We began our study of taxes in Chapter 6. There we saw how a tax on a good affects its price and the quantity sold and how the forces of supply and demand di- vide the burden of a tax between buyers and sellers. In this chapter we extend this analysis and look at how taxes affect welfare, the economic well-being of partici- pants in a market.
IN THIS CHAPTER YOU WILL . . .
Examine how taxes reduce consumer and producer surplus
Learn the meaning and causes of the deadweight loss of a tax
Consider why some taxes have larger deadweight losses than others
Examine how tax revenue and deadweight loss vary with the size of a tax
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